Blink! U.S. Debt Just Grew by $11 Trillion

Aug. 9 (Bloomberg) -- Republicans and Democrats spent last
summer battling how best to save $2.1 trillion over the next
decade. They are spending this summer battling how best to not
save $2.1 trillion over the next decade.

In the course of that year, the U.S. government’s fiscal
gap -- the true measure of the nation’s indebtedness -- rose by
$11 trillion.

The fiscal gap is the present value difference between
projected future spending and revenue. It captures all
government liabilities, whether they are official obligations to
service Treasury bonds or unofficial commitments, such as paying
for food stamps or buying drones.

Some question whether “official” and “unofficial” spending
commitments can be added together. But calling particular
obligations “official” doesn’t make them economically more
important. Indeed, the government would sooner renege on Chinese
holding U.S. Treasuries than on Americans collecting Social
Security, especially because the U.S. can print money and
service its bonds with watered-down dollars.

For its part, economic theory sees through labels and views
a country’s official debt for what it is -- a linguistic
construct devoid of real economic content. In contrast, the
fiscal gap is theoretically well-defined and invariant to the
choice of labels. Each labeling choice changes the mix of
obligations between official and unofficial, but leaves the
total unchanged.

Dangerous Growth

The U.S. fiscal gap, calculated (by us) using the
Congressional Budget Office’s realistic long-term budget
forecast -- the Alternative Fiscal Scenario -- is now $222
trillion. Last year, it was $211 trillion. The $11 trillion
difference -- this year’s true federal deficit -- is 10 times
larger than the official deficit and roughly as large as the
entire stock of official debt in public hands.

This fantastic and dangerous growth in the fiscal gap is
not new. In 2003 and 2004, the economists Alan Auerbach and
William Gale extended the CBO’s short-term forecast and measured
fiscal gaps of $60 trillion and $86 trillion, respectively. In
2007, the first year the CBO produced the Alternative Fiscal
Scenario, the gap, by our reckoning, stood at $175 trillion. By
2009, when the CBO began reporting the AFS annually, the gap was
$184 trillion. In 2010, it was $202 trillion, followed by $211
trillion in 2011 and $222 trillion in 2012.

Part of the fiscal gap’s growth reflects changes in policy,
such as the Bush and Obama tax cuts, the introduction of
Medicare Part D, and the expansion of defense spending. Part
reflects “natural” growth of existing programs, including growth
in Medicare and Medicaid reimbursement rates. And part reflects
the demographic time bomb U.S. politicians are blithely
ignoring.

When fully retired, 78 million baby boomers will collect,
on average, more than 85 percent of per-capita gross domestic
product ($40,000 in today’s dollars) in Social Security,
Medicare and Medicaid benefits. Each passing year brings these
outlays one year closer, which raises their present value.

Governments, like households, can’t indefinitely spend
beyond their means. They have to satisfy what economists call
their “intertemporal budget constraint.” The fiscal gap simply
measures the extent to which this constraint is violated and
tells us what is needed to balance the government’s
intertemporal budget.

The answer for the U.S. isn’t pretty. Closing the gap
using taxes requires an immediate and permanent 64 percent
increase in all federal taxes. Alternatively, the U.S. needs to
cut, immediately and permanently, all federal purchases and
transfer payments, including Social Security and Medicare
benefits, by 40 percent. Or it can mix these terrible fiscal
medicines with honey, namely radical fiscal reforms that make
the economy much fairer and far stronger. What the government
can’t do is pay its bills by spending more and taxing less.
America’s children, whose futures are being rapidly destroyed,
are smart enough to tell us this.

(Laurence Kotlikoff, an economist at Boston University, and
Scott Burns, a syndicated columnist, are co-authors of “The
Clash of Generations.” The opinions expressed are their own.)